Something was out of place yesterday. With a Russian proposal on the table to have the UN take control of Syria’s stockpile of chemical weapons and President Obama’s real opportunity to move away from attacking Syria, the S&P rallied and rallied hard. Sure, China started the rally, but that’s not the full reason the stock market rallied.
Streaks are made to be broken
With the S&P closing weak 8 out of the last 9 sessions, it reversed course yesterday and started taking out the upside buy stops. This forced more shorts to cover into the rally. It’s again looking like the S&P got ahead of itself. This was yet another reminder that when a big obstacle is removed and everyone is short, the spoos have no place to go but up. Yesterday the Pit Bull said this is just an extension of the current trading range of 1625-1630 to 1670 to 1680. The upward trending channel and S/R levels show us that this is true.
Bad News/Good News Bears
We have always been a firm believer that bad news is generally followed by good news (at least from the market’s perspective) and aside from Chinese exports beating projections there were several drivers yesterday:
No. 1 on the list: President Obama saying he was going to take a “hard look” at the Russian proposal for Syria to put its chemical weapons under international control.
Also on the list:
- Apple[AAPL] closed up +1.6% in front of its product announcement.
- Delta Air Lines [DAL] rose 9.4%, its largest gain since April 16, as the world’s second largest carrier prepares to rejoin the S&P 500 Index. Shares of companies joining the S&P 500 often go up because portfolio managers are forced to buy those companies in order to track the index.
- The Dow had its best performance in eight weeks with 29 of the Dow 30 closing higher.
- The S&P 500 closed up 1% and is on its longest winning streak since July. It closed above its 200-day moving average at 1657 with all 10 S&P sectors closing higher. Though it dropped below the MA overnight, the close is a decisive move.
- The NASDAQ closed up 1.26% and reached levels not seen since October of 2000. Remember that dot-com thing?
- Bonds closed up 23 ticks.
Perfect storm
Everything was working in favor of the S&P yesterday, but we think the jury is still out. The public got bearish over the last few months, but at the end of the day the S&P is only 34 handles off its contract high. We don’t believe the all-clear siren has gone off yet, but the rally is making mincemeat of the shorts yet again and we see it from some of the big orders we take from the hedge funds we execute for. Is the downside over? No, but we may have to wait until next week to really see what the S&P is made of.
The Asian markets closed higher and Europe is trading higher across the board as well. We have a light economic calendar for the next two days. While we think most traders are back at their desks, they do not seem to be trading. You can see it in the overall volumes.
Today after the close Delta joins the S&P 500, replacing BMC Software, which may lead to a rise in Delta’s price. BMC is being acquired by Bain Capital. It’s not a no-brainer buy, however. Anyone who says this trade is easy should show us their trading statement. The S&P has closed higher 6 out of the last 8 trading days and 4 out of the last 5.
We do not want to over-project higher prices in the S&P. Sure, if the S&P can get above 1680 we could see a push back to the big figure at 1700, but we think you have to be concerned about what the Fed will have to say next week during its two-day meeting. Yesterday San Francisco Federal Reserve President John Williams said he would go into next week’s policy-setting meeting with an “open mind” on whether to begin curtailing the $85 billion a month bond purchases. We think the Fed is likely to start cutting back but will say they plan on keeping the program going. That conclusion may already be priced in by the market, with orders programmed and waiting.
Our view
So far this month the Dow is up 1% and the S&P and NASDAQ are up 2%. Yesterday we said sell the early rally, which was right. But we left off the buy the weakness part. After months of weak Mondays, the bulls handed it to the bears. Our main rule after a big up day is that the S&P tends to go sideways to lower. The rule is called Turnaround Tuesday and it often kicks in right after the open.
If in doubt, sit out the opening range until you get a clear idea of the trend and how you want to approach it. Remember that standing aside is taking a position.
Ned Davis S&P Cash Study
Remember to look for the Pit Bull’s Thursday/Friday low this week. To complement that idea, take a look at the Ned Davis S&P cash study numbers for the September quadruple witching. It’s a lot of data, but you can see what’s behind our thinking and recommendations this week and next.
As always, keep an eye on the 10-handle rule and be especially careful to use stops in this volatile time.[pullquote]Marty the PitBull Schwartz speaking at Amherst College.[/pullquote]
- In Asia, 11 of 11 markets closed decisively higher (Hang Seng +0.99%, Shanghai Comp. +1.15%, Nikkei +1.54%).
- In Europe as well, markets are higher across the board (DAX +1.68%, FTSE +0.72%).
- Morning headline: Syria diplomacy, strong China numbers lead to global rally
- Total volume: 1.5 million ESU and 7k SPU
- Economic calendar: NFIB Small Business Optimism Index, Redbook, JOLTS, 3 year note auction and the AAPL event.
- MrTopStep Closing Print Video
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